How wide is your insolvency exclusion?

The High Court gives an insolvency exclusion a wide scope and declines to apply narrow interpretation rules for exclusions in insurance contracts in Crowden and another -v- QBE Insurance (Europe) Ltd [2017] EWHC 2597 (Comm).

Summary

On an IFA's recommendation, its clients put money into funds investing in bonds and securities. After the issuers of the bonds and securities became insolvent, a claim was brought against the IFA alleging negligent advice. The IFA's professional indemnity (PI) insurer argued that the claim fell within the policy's insolvency exclusion. The High Court held that the insolvencies need not be the proximate cause of the claim but could be a relatively remote cause and still trigger the exclusion.

In doing so the Court affirmed that the rules of construction that apply to exclusion clauses in other contexts do not apply to insurance contracts. This was because insurance exclusions define the scope of cover rather than excluding policyholder rights which would otherwise arise. It was not appropriate automatically to favour narrower constructions of insurance exclusions.

Background

The claimants sought the advice of Target Financial Management Ltd, an IFA. Target arranged investments for them in a fund holding a bond issued by SLS Capital SA and a fund buying securities issued by Lehman Brothers Inc. SLS went into liquidation and Lehman Brothers entered Chapter 11 protection.

Target also went into liquidation and the claimants obtained default judgment against it. They brought a claim against Target's PI insurer, the Insurers, under the Third Parties (Rights against Insurers) Act 1930 for close to £200,000.

The exclusion clause

The clause excluded any claims, liability, loss, costs or expenses:

"…arising out of or relating directly or indirectly to the insolvency or bankruptcy of the Insured or of any insurance company, building society, bank, investment manager, stockbroker, investment intermediary, or any other business, firm or company with whom the Insured has arranged directly or indirectly any insurances, investments or deposits…"

The insurers argued that the exclusion applied if insolvency was one cause of the claim or loss. Although the claim was directly caused by Target's advice, the loss was caused (even if indirectly) by the insolvency of the underlying investments in Lehman Brothers and SLS. The insurers also argued that this made commercial sense as the policy was issued in 2009 at the height of the financial crisis.

The Claimants argued that their claim was caused by Target's advice and the insurers view of the policy would exclude "wide tracts of ubiquitous financial business."

The Court's decision

The Court held that the clause applied if insolvency was a cause of the claim or loss even if not a proximate clause; here the insolvencies had precipitated the claim and so the clause clearly applied. The Court also felt this construction made commercial sense. The Court declined to apply the narrow approach to the construction of exclusion clauses used in other contracts. This was because insurance exclusions define policy scope whereas normal contractual exclusions seek to remove rights which would otherwise exist.

The Court flagged that if there is genuine ambiguity in a clause or if the effect of the clause is to exclude all or most of the cover the policy was intended to provide, so robbing it of commercial value, then the Court may apply a narrower construction. The clause in this case did not leave Target without substantial cover, so a narrower construction should not apply.

Comment

This decision is to be welcomed by insurers. It potentially gives insolvency exclusions a wide scope. It also confirms that exclusions in insurance policies define the scope of cover, and that the Court will not generally apply a restrictive approach to their interpretation.

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